Economical factors are plenty and different. Virtually every economical factor, has a impact over the national currency directly or indirectly.
Undisputedly GDP (Gross Domestic Product) is one of the most important economical factors.
GDP = C + I + G + T
C – Consumption
I – Investments
G – Government Expense
T – Trade balance
Trade balance is equal to the difference between export and import of a country
T = Export – Import
Increased GDP has a positive impact over national currency. Bigger GDP means bigger production, bigger consumption, bigger capital movement and bigger interest of investors, that lead to bigger demand over national currency. This will strengthen the national currency against others.
Other economical factors are:
- Consumer Price Index
- Production Price Index
- Consumption Inclination
- Nonfarm Payrolls
- Housing construction and so on
Any change of those economical factors will have high or less impact over currency pairs. If change is positive – factor has positive impact, if change is negative – factors has negative impact.
In the last years we’ve noticed increased influence of stock markets over spot market. You can see this with Dow Jones. Most of companies that are listed in Dow have a worldly activities, weaker dollar has positive impact for the company’s’ growth, of course if there is strong economic boom this will lead to higher dollar.
This fundamental factors have the greatest impact over the Forex. Interest rates and inflations are directly connected. For every country interest rate is different and it is determined by country’s financial institution. For Europe this is ECB (European Central Bank), for USA is Federal Reserve, for Japan is BoJ ( Bank of Japan), for England BoE (Bank of England), for Switzerland SNB (Swiss National Bank) and the list go on.
If the central bank of country lower the interest rate, this will mean, that interest for loans will decrease – the price for loans will be more lower. This measurement will lead to higher loan taking, to higher money in current and in the end higher consumption. Meanwhile the higher and cheaper supply of money will lead to reduction of strength of national currency against others. We can conclude that lowering the interest rates of certain country will have negative impact on its currency.
The other case is if bank increase interest rate, the money supply is decreasing, money in current are less, people prefer to put their money in banks to make profits from higher interest rate. This automatically means that increased interest rate will have good impact over currency and will it strengthen it.
We will make some fictional scenario. Let’s say in some country the inflations is higher than interest. This means that is bad idea to put your money in bank because inflation “eats” the purchasing power of money. This is a fatal scenario for economic of that country. It will be fatal if interest is equal to inflation. In long term that will lead to high money saturation and will have bad impact over national currency. The ideal variant for economic will be if percentage of interest exceed the percentage of inflation.
%interest > % inflation